Why Postponing Your Renovations Will Ultimately Cost You More

Have you been dreaming about a new open plan kitchen or perhaps the addition of a new luxurious master suite but were put off when interest rates started creeping up a couple of years ago?  Now you’re hearing stories about how expensive it is to build in NZ.  So what do you do?

  • Do you bite the bullet and plough ahead? 
  • Or do you take a ‘wait and see’ approach in the hope that the cost to renovate will come down? 
  • Maybe you shop around and try to negotiate with numerous builders in the hope one of them is desperate enough to take your project on at a lower price?

The answer needs to take into consideration your personal circumstances but it’s also important to understand what is currently going on behind-the-scenes in the building industry.

In this article we will take you through some insights we have and explain how they may affect your decision to commit or delay.

Firstly, let’s address a ‘myth’ that seems to be circulating at the moment.  One that could cause financial consequences for anyone that believes it…

“Building costs will come down again”

During the COVID pandemic years of 2021 and 2022, as supply chains were challenged, we saw the cost of building materials increase.  Timber and steel in particular rose dramatically.  The impact of these costs increases has been significant.  In February 2024 Statistics NZ reported that the cost of building a new home or completing a major renovation project has increased by 41% since 2019[i].

Now we are coming out the other side of the pandemic, we have seen reductions in the prices of some materials, including timber, in the past year. This has lead some people from outside the industry, to predict that building costs will reduce again in the coming months.

Unfortunately, what hasn’t been taken into consideration is the effect inflation has had on the myriad of other building materials as well as on wages and salaries within the industry.  Essentially these increases negate any recent decreases in the cost of timber and steel.

The fact is building costs are not coming down. Delaying your renovations will not bring about the cost savings you are possibly expecting.

home renovation aucklandThe true cost of ‘Net Zero’ 2050 on building costs

New Zealand has a target of net zero emissions by 2050.  It is an ambitious goal that will involve substantial focus and effort from the Government and all industries.  And the building industry is not exempt. To help achieve this target our homes will need to be net zero buildings – a building that has no net carbon emissions during its construction and operation.

This involves reviewing our building code, the products we use and our methods of construction.  Steps have already been taken with the introduction of new energy efficiency regulations in 2023.  In brief, insulation requirements were increased, and window and door joinery now need to be thermally broken with low E glass to help make our homes warmer, drier and healthier.

Whilst this is a positive move, unfortunately, as you might expect, these additional requirements do come with extra costs and have more than likely contributed to the 41% increase in building costs previously mentioned.

There are further changes and updates to our building code in the wings that are currently being researched.  As we pursue our net zero target we also need to understand and accept that this goal is very likely to have an impact on building costs – whilst it might be more cost efficient to heat and cool your home in the future, there is a high chance it will cost you more to build it.

The risks of multi-quotingrenovation budget

Due to the current economic climate, and particularly the rising interest rates, the building industry has seen a notable downturn in activity over the last six months or so.  Some homeowners might see this as an opportunity – to haggle with multiple builders in the hope at least one of them will be desperate enough to take their project on.  There’s nothing wrong with trying to drive down the price of anything, but it does come with some real dangers, especially at this time of economic uncertainty.

The fact is all builders have access to the same building materials and the same pool of labour at very similar costs.  This means that when they undertake home renovations to the same quality there is very little difference in their costs.

So, if you are comparing multiple quotes and making your decision based on price alone, you need to proceed with great caution.  The builder with the lowest quote has either missed things (either accidentally or on purpose) or they are the most desperate for cash – both should be large red flags.

According to a Stuff article published earlier this year liquidations of construction companies are running at a rate twice that of other businesses[ii] which is indicative of the difficult market conditions in the building industry.  And unfortunately, the commentary from many economists suggests things could get tougher.

Our advice is to take heed of these red flags and be extremely wary of any builder prepared to ‘sharpen their pencil’ to win your job.  Perhaps they are teetering on the edge.

Selections imageNow is the ideal time to start planning

Building costs are only part of the equation when considering home renovations.  Most significant building projects are completed using borrowed money so interest rates are also an important factor to consider.

Unfortunately for many homeowners, our economic response to the COVID pandemic meant the NZ Reserve Bank had to raise interest rates to prevent the economy from overheating.  Higher interest rates will moderate borrowing and spending, which helps prevent and manage excessive inflation whilst hopefully maintaining sustainable economic growth[iii].

Based on the most recent GDP figures released in March, the interest rate hikes have done their job and the country entered a recession in late 2023.  This was somewhat unexpected and has led to many economists now suggesting that the Reserve Bank may need to start considering cutting interest rates earlier than initially thought.

So, whilst building costs are not coming down, the recent economic data suggests that interest rates will likely start dropping – and possibly by the end of the year[iv].

Whilst this is very promising, if you are keen to avoid further increases in building costs and to be able to take advantage of any reductions in interest rates, then now is the ideal time to start planning your renovation.

The planning and consenting phases of a renovation project takes several months – from developing the concept designs, approving/adjusting the budget, producing the building consent plans and obtaining council approval.  So, if you have any thoughts of undertaking your renovation project in 2025, our advice is to make contact and start planning it now to avoid missing the summer construction slots and the lower interest rates that sound like they will be coming our way.

 

 

 

 

 

 

[i] ‘Government tackling high construction costs’ - PR release from Hon Chris Penk, Minister for Building & Construction dated 15th February 2024

[ii] ‘They have a tendency to run out of cash quick’: Crunch hits construction’ – Stuff article published on 11th February 2024

[iii] ‘New Zealand economy unexpectantly shrinks, entering recession’ – Bloomburg article published 21st March 2024

[iv] ‘Tony’s View – Weak indicators relevant to monetary policy’ – Tony Alexander, 4th April 2024

 

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